Why Creditors and Debt Collectors Are Willing to Negotiate Debt
Unsecured creditors and debt collectors are willing to negotiate debt for the following reasons:
(1) Unsecured debt is often completely discharged in a Chapter 7 bankruptcy. Even when a debtor files Chapter 13 bankruptcy, an unsecured creditor will likely collect little of what is due. The odds that an unsecured creditor will receive any funds at all if a debtor files bankruptcy are so small that several major credit card issuers write off a debt completely without putting up a fight when they receive notice that a customer has filed bankruptcy. They don't even bother to file a claim with the bankruptcy court. Usually, informing a creditor that you are on the verge of filing bankruptcy will get his attention.
(2) Consumer debt is at an all-time high -- $680 billion (a twenty-fold increase in the last 20 years) -- and so is the number of personal bankruptcies. A record 1.6 million personal bankruptcies were filed in the year 2002 and the number is expected to increase each year for the foreseeable future. The credit card industry contributed heavily to congressional campaigns in order to get favorable legislation passed that would revise the bankruptcy code to make it much harder to write off credit card debt in a Chapter 7 bankruptcy. These revisions passed the House, but the bill was ultimately defeated over petty partisan squabbling in Congress in November, 2002. Since this measure has failed and the economy is currently in dire condition with 8 million Americans unemployed and unable to find work for a year, the number of bankruptcies in 2003 and 2004 is likely to soar. Unsecured creditors are well aware of this fact and will be more willing to help debtors keep current on their bills.
(3) Delinquent accounts and bad debt is costing unsecured creditors a fortune. Collecting and writing off bad debt has become their #1 expense and is seriously eating into their profits. Credit card companies and the health industry, in particular, write off millions each year in uncollectible debt, and pay credit counseling services a small fortune to administer debt management programs. In fact, the credit card industry once allowed credit counseling services to keep 15% of everything they collected, but the credit card industry became alarmed when credit counseling became their second biggest expense and reduced the percentage to 8%. If you contact a creditor directly and work out a new payment agreement, the creditor doesn't have to pay a credit counseling service it's 8% cut.
(4) Only a small percent of debt is ever collected once it becomes seriously delinquent (90 days or more past due). For debt collectors, only about 5% of accounts turned over to them are ever collected. Since the original creditor has basically given up on ever collecting a debt once it turns an account over to a debt collector, a debtor has much more leverage in terms of negotiating a debt once the account is in the hands of a debt collector. Debt collectors will insist that you pay them 100% of what you owe; however, they will accept 50% or even as little as 25% if they believe this is the most that they will ever get out of you.
(5) Filing suit to recover bad debt is time-consuming and expensive. If a creditor filed suit against you today, it would be at least 16 months before he got any justice. And the attorney he hires to sue you isn't willing to work on a contingency basis -- she expects to receive at least $2,000 to file the suit against you. The creditor will never see this money again unless he is awarded collection costs in a judgment that he is able to collect this from you. For this reason, filing suit is a very risky thing to do in many circumstances. If a debtor has no property to seize or wages to garnish, a judgment is a complete waste of time. And it is why a creditor will never sue you for a relatively small amount.
(6) No longer a stigma surrounding bankruptcy. Until recently, most of those who filed bankruptcy were embarrassed about it and even discriminated against by society at large. However, there is no longer a stigma about it and more and more debtors are discovering how relatively easy it is to get out of paying debt without shame.
If you can negotiate successfully with a creditor or debt collector, you can settle your debts for much less than what you owe; you can work out alternate payment arrangements and get reduced interest rates to help you during tough times; and you can avoid bankruptcy and credit counseling services altogether. Most of the time, working with you is the easiest and most profitable way for a creditor to behave, and so they will be flexible if you contact them with your debt problems. However, this doesn't mean that creditors and collectors are pushovers. If suing you and garnishing your wages is the best option for them, then they will use it. If waiting for you to file bankruptcy so your assets can be liquidated and they can recover what is owed them, then they will wait. Always remember this fact when formulating your negotiating strategies.